Reappraisal of exchange rate regimes

The real appreciation of the RMB is much more than the 30
per cent since the exchange rate reforms of 2005 as mentioned in the post,
given that inflation in China has been far greater than that in the US.

Having an annual limit on the total movement of the exchange
rate has merits, although the exact figure can be hard to determine and it is
not necessarily asymmetry between the upper and lower bounds. It should ideally
be linked to some measure of equilibrium level of exchange rate, based on
relative inflation rates and trade situations.

In that sense, the 7.5% limits appear to be arbitrary, as
the author seems to have acknowledged.

In terms of sequence of reforms, removing trade distortions,
such as export subsidies and imports restrictions should probably take a higher
priority than exchange rate reforms.

Further, it is not necessarily certain that free exchange
rate regime is better than a fixed exchange rate regime if the effects of
exchange rate bubbles on the real economy are taken into account.

The advantages of monetary policy freedom must be balanced
with the distortionary effects on resource allocation in the real economy and
potentially damaging adjustments.

So far, people take the easy way, that is, monetary policy
freedom, but leave the blames of real damage to the markets to avoid
accountability.

That is not necessarily optimal for the world economy or
indeed any individual economies.

In my view there is a need for a reappraisal of exchange
rate regimes with a new framework in which both the effects of both monetary
policy and the effects of exchange rate on the real economy are taken into
account, and consider whether there are any new policy design for the
international system to work better.

There should be a system that has a set of well-designed
rules to allow countries to choose a fixed or flexible exchange rate regime and
should a fixed regime is selected how the system will adjust under a set of
agreed rules.

Such a system can and should include provisions that will
allow monetary flexibility for every country supported by a set of agreed
international rules.